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Ecuador—Tax Reforms and the Economy

June 28, 2022, 7:00 AM

On May 24, 2022, the Ecuadorian government, led by Guillermo Lasso, celebrated its first year in power. For the second year of its four-year term, the government has opted to renew its communication strategy and has set aside (for now) the possibility of a referendum and the option to call for early elections. There have also been major changes within the cabinet and the general administration.

During his address to the nation, Lasso announced the primary accomplishments of the current government, which included:

  • the extreme poverty rate having fallen to 10.5% from 15.4% as of December 2021;
  • a reform to reduce tariffs on more than 600 items, which has resulted in significant savings in raw materials and capital goods;
  • signing of private investment contracts totaling $5 billion in value and identification of an investment portfolio of $39 billion; and
  • the intention to enter into 10 new trade agreements by 2025, including agreements with Mexico, Israel, and the Pacific Alliance.

During the month of June, indigenous groups have mobilized across the country, demanding several economic reforms and the stabilization of gas prices. At the date of publication of this article, the government is waiting for negotiations with indigenous groups that will most likely result in new economic and social reforms.

Internal Revenue Service

The IRS is a key pillar for the government, as the income earned from tax collection is a significant part of the 2022 budget. After completing a four-year term as Director of the IRS, Marisol Andrade was replaced by Francisco Briones, who had been serving as the Cabinet’s deputy secretary general.

According to the official IRS records, between January and May 2022, IRS collections were over budget. Income tax collection accounted for $2.7 billion, while value-added tax (VAT) internal operations reached $2.3 billion. Import taxes—VAT and excise tax—totaled $1.08 billion, in comparison to a budgeted amount of $844 million.

The Law for Economic Development and Fiscal Sustainability after the Covid-19 Pandemic was published on Nov. 29, 2021. The enactment of the law was absolutely critical to continuing with the International Monetary Fund (IMF) financing program, which was crucial, considering the devastating effects of the Covid-19 pandemic on the Ecuadorian economy. This law created new taxes that will contribute to the increment of tax collection efforts.

New Taxes

It is important to note that in the current fiscal year, the IRS is collecting new taxes. A special tax is payable by individuals who, as of Jan. 1, 2021, have a net equity greater than $1 million. A similar amount is due from married couples with a net equity equal to or greater than $2 million.

A special tax is payable by companies domiciled in Ecuador if their net equity as of Dec. 31, 2020 is equal to or greater than $5 million. The tax rate is 0.8%. Companies are required to pay the tax in both 2022 and 2023.

Electronic Invoicing

On May 27, 2022, Resolution No. NAC-DGERCGC22-00000024 was published, whereby the IRS created the parameters for electronic billing, as established in the Law for Economic Development and Fiscal Sustainability.

The main purpose of invoice digitalization is to reduce tax evasion and reduce paper waste when issuing sales receipts, withholding vouchers, and other supporting documents.

The obligation to implement electronic invoicing has applied in Ecuador since 2014. It was initially required of certain taxpayers, and its expansion has been progressive. Under the rules set out in the resolution, the following will be obliged to issue electronic sales receipts, withholding vouchers, and other supporting documents:

  • All individuals and companies considered income taxpayers who are not currently subject to electronic billing, and
  • All individuals and companies not considered income taxpayers, but who are obliged to issue invoices and are not currently subject to electronic billing.

The individuals and companies obliged to issue electronic invoices and that are considered withholding agents will have to implement the Simplified Transactional Annex (ATS) version of the withholding vouchers according to the technical IRS standards implemented for such purposes, by Nov. 29, 2022.

This measure seeks to replace the ATS report and will also optimize the internal operations of the taxpayer and the IRS. Under the new system, withholding agents must issue electronic withholding vouchers even when payments are not subject to VAT or income tax withholdings.

As of Nov. 30, 2022, authorization for issuing printed invoices will only be given to taxpayers who have previously obtained authorization for issuing electronic invoices, and their use will only be permitted in cases of force majeure. Paper invoices must fulfill the requirements established in the regulation on sales vouchers, withholding slips. and other supporting documents. The number of invoices issued cannot pass 1% of the total sales receipts issued in the previous fiscal year.

Taxpayers will also be able to access a free tool offered by the IRS for generating their electronic vouchers. However, companies and individuals may also use their own software as long as it meets the specifications established in the current law.

The electronic invoicing system will not apply to taxpayers considered “micro businesses,” with annual sales totaling less than $20,000, unless they had previously been required to issue electronic sales receipts, withholding slips, and other supporting documents.

The Economy

As an oil exporter, Ecuador has benefited from the significant increase in oil prices. During the month of June, the West Texas Intermediate WTI surpassed $120 per barrel. According to the National Institute of Statistics, inflation in April 2022 was at 2.89%, compared with -1.47% in the same period in 2021.

During the first quarter of 2022, Ecuador’s debt ratio reached 57.85% of its GDP, compared with 65.50% in the previous fiscal year. This reduction is in line with the agreements reached with the IMF, and subsequent fulfillment of the terms established therein by the Ecuadorian government. As of May 2022, Ecuador’s international reserves had reached $8.3 billion, a significant improvement over the same period in 2021, when they were $5.7 billion.

Ecuadorian Finance Minister Simón Cueva has noted that economic policies implemented by the government will lead to a reduction in the fiscal deficit, which has gone to 4% in 2021 from a 7.5% deficit two years ago, and this year is expected to close with a 2% deficit.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

Author Information

Diego Andrés Almeida is the managing partner and Dayana Naranjo is an associate with Almeida Guzmán & Asociados.

The authors may be contacted at: daa@almeidaguzman.com; dnaranjo@almeidaguzman.com